Indian Government and Vodafone Group Talk Tough

The British telecommunications company Vodafone Group owes the Indian government 200 billion rupees ($3.7 billion) in taxes and late fees related to its 2007 acquisition of Hutchison Essar, R.S. Gujral, India’s finance secretary, said Wednesday during an interview with NDTV. “There is no question of the government negotiating.”

Vodafone and the Indian finance ministry have been locked in a battle over taxes the government is charging in Vodafone’s $11.1 billion purchase of a majority stake in Hutchison Essar. India’s tax department says Vodafone owes taxes on the deal, while Vodafone said it does not, because the deal was conducted between two entities that were not in India, and Hutchison’s parent company, Hutchison Whampoa of Hong Kong, pocketed the proceeds.

India’s tax department has argued that Vodafone should have deducted taxes from the amount it paid to Hutchison. India’s Supreme Court sided with Vodafone in January, but the finance ministry proposed new legislation to retroactively tax the deal afterward.

In a statement Wednesday afternoon in India, Vodafone said it was “disappointed.”

“It would be grossly unjust if, on the basis of legislation passed five years after the event, Vodafone were to be charged tax on a gain made by someone else, especially where the Indian Supreme Court unambiguously ruled that no tax was payable in India according to the laws of India in force in 2007.” The company said it would take “all possible steps” to protect its shareholders interests.

Vodafone has invested over 500 billion rupees ($9.3 billion) in India since it entered the market in 2007, the company said Wednesday, and said it “has yet to take a single rupee out of the country.” Vodafone wrote down the value of its Indian operations by $3.5 billion in 2010.

Vodafone Group’s full statement:

We are naturally disappointed that, despite very widespread concern in India and internationally, the Government has not seen fit to propose amendments to address the uncertainty caused by retrospective tax legislation. We are studying the legislation as amended, and will take all possible steps to safeguard our shareholders’ interests. It would be grossly unjust if, on the basis of legislation passed five years after the event, Vodafone were to be charged tax on a gain made by someone else, especially where the Indian Supreme Court unambiguously ruled that no tax was payable in India according to the laws of India in force in 2007. Given this clarity, there was no legal basis for Vodafone to withhold tax.

We continue to be a very committed investor in India. Vodafone has created tens of thousands of jobs in India and our business helps underpin a distribution chain of over 1.4million small and micro businesses throughout the country. Since we entered the market in 2007, Vodafone has invested over 50,000 crore, or 500 billion rupees, in our operations and we have connected 60 million rural Indian customers who are now able to communicate on our network. During the last four years, Vodafone also has been one of the larger taxpayers in India – with its Indian businesses paying over 29,000 crore, or 290 billion rupees, into the Indian Exchequer. To underline our commitment for the long term, despite making considerable investments over the past five years, Vodafone has yet to take a single rupee out of the country.

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